Private equity solutions can co-exist with the US government’s Troubled Assets Relief Program in providing capital to the banking industry, according to Joshua Siegel, managing principa
Private equity solutions can co-exist with the US government’s Troubled Assets Relief Program in providing capital to the banking industry, according to Joshua Siegel, managing principal of asset management firm StoneCastle Partners.
Speaking at a Conference of State Banking Supervisors meeting in Tucson, Arizona, Siegel said: ‘Private investor interest is growing and the government support of the banking industry is disproportionate. TARP is a short-term and temporary solution aimed towards assisting the money centre and large regional banks. Some community banks want equal access to federal funds, but all community banks need dedicated capital providers. Not enough funds are reaching main street.’
Banks generally are less risky than other corporations, he said. Of the total universe of 8,384 banks, there are currently 171 FDIC-insured ‘problem’ institutions, and there have been just 25 failures in 2008.
Fewer than 140 banks have failed since 1992 and prior recessions have had little direct impact on bank failures, which generally are uncorrelated to GDP growth, he said. However, Siegel stated that a bank’s earnings are historically correlated to periods of recession.
He said that community banks which have stuck to their core traditional business model have outperformed their larger peers. Community banks provide services to under-served, rural and suburban markets and play a substantial role as lenders to small businesses. These banks have demonstrated long-term, stable historical performance, are highly regulated and generally have higher capital ratios, Siegel said.
‘Institutions which deviated from their core community banking strategy and expanded beyond their footprint, into higher-risk loans or into hyper-inflated real estate markets, are the ones that have gotten into trouble. Overall, the majority of community banks are attractive,’ he added.
Siegel believes that private equity can provide an alternative to TARP, can be a source of funds in addition to TARP, or can be a potential exit strategy for government financing. In particular, non-control investments, versus control/buyout investments, can offer viable private market capital solutions to a broader range of banks.
‘There is a large universe of targets open to non-control investments, which allow investors to participate with well-run banks,’ Siegel said.
He said that longer-term, a variety of innovations could facilitate private investment in the banking industry. These could include public/private partnerships; the involvement of federal, state and municipal investors and pension funds; the easing of bank holding company rules; and greater transparency.
‘Overall, the industry is trending back to its traditional model,’ Siegel said. ‘There will be winners and losers, but the banking industry will survive.’
